Henry D. Wolfe discusses the characteristics organizations should be looking for in its board members, from an internal drive to the courage to make waves and a commitment to holding management accountable.
Every day, it seems, there is a host of new proposals and ideas for who should be appointed to public company boards and how. But there’s an important question missing from the debate:
What specific attributes should we be looking for to ensure that directors of public companies are not only good enough, but truly great?
From decades of experience serving on the boards of companies and organizations, I have seen the immense difference it makes to a company’s ultimate success when each member of a board is engaged in and contributes to the value maximization process. Truly great directors play an active role in this process, but there are a number of characteristics and actions they must demonstrate that underpin their ability to play this role.
1. Intent
A director’s primary intent when joining a board should be to engage in the development of the full potential of the company and thus maximize its longer-term value – period. It should never be about networking, building a resume, supplementing income, professional development, prestige or worse, making a social statement.
2. Drive
The intent described above intrinsically drives an individual to focus on maximizing a company’s performance. Great directors have an internal fire that drives them to want to make a company the best it can be. This is the same type of drive that a world-class athlete brings to his or her sport.
3. Ownership Mindset
Great directors also need to have a sense of ownership of the company they are helping to lead. In other words, they need an ownership mindset. In a perfect world, a director will make a meaningful investment in the company in order to be fully engaged. Short of that, an ownership mindset is critical, as it guides all behavior from the context of being an owner.
4. Knowledge of the Business & Its Value Drivers
According to a McKinsey study, only 22 percent of directors completely understand how their companies create value, and only 16 percent completely understand their firms’ industry dynamics.1 A really great director is not going function in such a state of complacency.
I propose a completely new governance model for public companies. One essential aspect of this new model is the board-initiated execution of a deep-dive due diligence process not unlike private equity firms perform on the companies they acquire. The intent of this diligence process is to determine the full potential of the company and to identify the major initiatives that will drive toward this potential. This solves the “lack of knowledge” issue on the part of directors.
Short of the full implementation of this new model, a great director will take every step available to learn about the business, its potential and the value drivers that will bring this potential into reality. This should go far beyond a “director orientation” and can include, but not be limited to, in-depth discussions with the CEO and other board members; visits to the company’s facilities, coupled with conversations with employees; visits to customers and suppliers; studying the company’s past annual reports in detail; studying analysts’ reports; requesting specific analyses, such as key metric comparatives with peer groups; and reviewing current and past information on the company and its industry(s).
Governance should primarily be about maximizing the business being governed, not being a “caretaker overseer.” A director cannot engage properly in this regard without sufficient knowledge.
5. Courage to Rock the Boat
When a nominated or invited by a chairman, CEO or chairman of the governance and nominating committee, many directors find it tough to do more than go along for the ride and periodically ask a few perfunctory questions.
To raise tough questions and to push for minor or major change is potentially directly critical of those who extended the invitation. And while having a majority of independent directors is better than an “old boys’ network of cronies,” qualifying as independent does not in and of itself ameliorate this potential difficulty.
Yet this is exactly what the director role should be. It is simply not possible to be a great director without being willing to rock the boat when necessary. Board members do not work for management or any of the other board members – a director’s responsibility is to shareholders and, when executed properly, this responsibility is not just to “protect” shareholders’ investments, but to maximize value – the latter cannot be stressed with too much emphasis. And having as much knowledge as possible as discussed above greatly adds to a credible and effective “rocking the boat” action.
Some people, including highly successful ones, are not capable of functioning in this manner; this should be a disqualifier for a board member.
6. Insistence on Clarity of Value Drivers & Related Information Flow
The deep-dive due diligence process referenced previously will lead to the identification of a handful of core initiatives that should be executed to maximize shareholder value. When this is done, the details regarding the execution of these initiatives are developed in a value maximization plan (not to be confused with typical corporate strategic plans).
At best, a value-oriented director will advocate very strongly for this type of diligence process and subsequent plan. However, if this is not successful, at the very least, a great director will insist on the following:
- The board’s full engagement in whatever planning process undertaken by the company leading to an agreement with and clear understanding of the initiatives to be pursued and/or will push for certain new initiatives currently not pursued, but uncovered in the directors’ personal deep dive or experiential industry or other relevant knowledge.
- A plan of execution for each initiative with identification of initiative owner, timelines, milestones, metrics and/or other measures of plan progress.
- The board’s input into the flow of information from management to the board. Specifically, high-performing directors will insist on timely and clear information in regard to progress toward key milestones, metrics and targets reflected in the plan for each initiative and any other information that will assist the director in improving the company. Depending on who is in the CEO role, this may be highly discomforting to management. Even so, this is no reason for a director to back off of his or her specific requests for information that will enable the director and the full board to do its job.
Without the right information that shows progress – or lack thereof – toward the targeted end result of the levers being pulled (initiatives) to maximize longer-term value, there is absolutely no ability on the part of the value-oriented director to do his or her job.
7. Engagement
Another characteristic of really great directors is a significant level of engagement. In no manner does this imply crossing the line into management, but it does imply much greater engagement than the typical public company director. The above discussion of information requests from a director is just one example of higher-level engagement.
This engagement includes carefully studying the information provided to the board, and especially the data in regard to progress toward initiative objectives; asking pointed and relevant questions of management during and outside of board meetings; deeply probing to get to the bottom of issues, especially relating to shortfalls in plan progress, etc. Great directors do not accept what management offers at face value, but instead engage management in detailed debate about salient issues.
It also should involve digging deep into the capital expenditure budget and becoming intimately involved in all capital allocation analysis and decisions. As over one-third of the $8 trillion of invested capital in the S&P 1500 does not earn the cost of capital, great directors understand their vital role in this process.
8. Willingness to Hold Management Accountable
Far too many public company directors do not fulfill what should be a basic responsibility to shareholders: holding management accountable. This should be as basic to boards as blocking and tackling is to football.
Holding management accountable does not imply an adversarial relationship. What it does imply is being intimately involved in how well the company is progressing toward plan targets and ensuring that management is taking the responsibility and initiative to make corrections where there are shortfalls (and adding emphasis where successes are solid). It also involves taking the time as noted previously to be on top of the different aspects of the company’s performance so as to be able to engage in a helpful discussion/debate with management and to provide guidance and advice.
Finally, it means being engaged enough to know when it is time to replace the CEO. And when this becomes necessary (including via a formal succession plan unrelated to performance issues), really great directors will take the time to identify what is essential from a value creation standpoint for the next CEO. Once identified, then the background of candidates will be scrutinized in detail in this value creation skill context rather than being swayed by glossy resumes or “political” issues.
This points above provide a very high-level look at the qualities and actions of a really great director. And note: All of the other items summarized flow naturally from the “Intent, Drive and Mindset” described at the outset. There are many individuals who are capable of functioning in this manner; they are just not always (or usually) where the establishment search processes venture. Nor do many (most?) public company boards want individuals who do their job at this level. Yet none of this changes the core characteristics of really great directors and the increasing need for the same in a business environment where competition will continue to accelerate.
(1) McKinsey & Company, Improving Board Governance August 2013 Global Survey http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our- insights/improving-board-governance-mckinsey-global-survey-results
Henry D. Wolfe is a private investor who has been an active catalyst for the creation of substantial value for shareholders in a variety of industry situations, both public and private. A graduate of Clemson University, where he was a member of the Clemson rugby team and served as its captain, Henry has been a frequent guest lecturer at Harvard University and is a Visiting Professor at York University in Toronto.
Henry is also the author of 
